Tax Talk

Tax Credits Vs Tax Deductions

A tax credit is an item that reduces the actual amount of tax that you owe. For instance, if you owe $100 and you apply a tax credit of $20, the amount owed becomes $80. Tax credits can be refundable or non-refundable. A non-refundable tax credit can reduce the amount of taxes you owe down to $0. For example, if you owe $200 and have a non-refundable tax credit of $300, your tax liability will be reduced to $0. The Savers Credit is an example of a non-refundable credit. A refundable tax credit can reduce your tax liability to less than $0 and lead to you receiving more money back than you paid in taxes. So if you paid $200 in taxes and had a refundable tax credit of $300 you would receive a $100 payment back from the government.  The Earned Income Credit is an example of a refundable tax credit.

A tax deduction is an item that reduces your income. For example, if your income is $40,000 and you have tax deduction of $5,000 then your taxable income is reduced to $35,000. How much this deduction will save you will depend on your tax rate. Your tax rate (also known as your tax bracket) is the maximum tax rate that the highest portion of your earnings are charged. As a general example – a person in the 25% tax bracket with a $1,000 income deduction might save $250 in taxes.

Tax Deductions: Should You Itemize?

 When we file taxes, the government allows filers to choose between taking a standard deduction or itemizing deductions. You cannot take both so the first thing to do is find out your standard deduction amount and then see if you have eligible items to take as itemized deductions and choose whichever is greater.

The standard deduction for filing taxes is based on filing status and is an amount set each year by the federal government. For the 2011 the standard deductions are:

-          Single or *Married Filing Separately – $5,800

-          Married Filing Jointly – $11,600

-          Head of Household – $8,500

-          If you are 65 or older or blind the standard deduction is increased.

*When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

The main types of things we can itemize are mortgage interest, taxes paid, gifts to charity, casualty & theft losses, unreimbursed job expenses, and medical expenses. However, for medical expenses, they must be more than 7.5% of your adjusted gross income to be included as an itemized deduction. It is called itemizing because the items mentioned have to be listed on a form called a Schedule A. A great way to get a look at what can be itemized would be to download a Schedule A from www.irs.gov

 For many homeowners the first thing to check is mortgage interest. If the amount of mortgage interest that you paid is greater than or close to your standard deduction, then it is likely that it will be better to itemize. One word of caution – I have heard people say that it is best not to pay off a house because than you lose the deduction. While this may be the case in some situations it is not likely the case for many people. If you are looking for tax efficient ways to handle assets seek out an experienced tax adviser.  

Above –the – line Deductions

In addition to the standard deduction and itemized deductions, there are “above– the-line deductions.” These can be taken regardless of whether or not you itemize. The complete list of items that can be deducted are found on form 1040 in the adjusted gross income section. They are called above-the-line because they are subtracted from your total income and used to calculate your adjusted gross income which appears before the last line on page 1 of the 1040 & 1040A tax forms. Examples of some of above the line deductions for 2011 are student loan interest, tuition & fees, IRA deduction, health savings account deductions, and educator expenses. These are just some examples. In 2011, Form 1040A only allows for deductions for educator expenses, IRA deductions, student loan interest and tuition & fees. To see a full list of above-the-line deductions download form 1040 from www.irs.gov

Buying Out of Fear

We often make financial decisions based on emotion instead of logic. Product marketers realize this and find opportunities to increase profits using advertising appeals that target our fears. The marketers illustrate dire consequences and then offer a product, for what may seem to be a reasonable price, that can give us peace of mind.

For instance,  we often see advertisements warning us of the dangers of identify theft and the need to purchase identify theft protection. Truth be told there are many free ways to protect ourselves thanks to federal and state laws. These laws include access to free credit reports, limited liability for fraudulent charges ($50 for credit cards), security freezes and fraud alerts.  

Credit protection plans are another type of product that needs to be evaluated with logic instead of emotion. These products promise to take care of our loan payments in the event of a crisis such as disability or death. These plans can be expensive and money spent towards the plan could be used to pay off debts. Alternatives such disability and life insurance, or establishing an emergency fund may be more cost effective options.

One-On-One Financial Guidance

The University of Florida has a new service to help people take control of their finances. It is called the Florida Master Money Mentor program. The mentors are volunteers who have completed the University of Florida Master Money Mentor training program and have also undergone a background check. This service is free to residents.

The mentors can provide guidance to help you develop a spending/saving plan, build a good credit history, manage debts, and plan financial goals. They do not provide legal or investment advice, nor do they sell products or services. They will provide mentoring for as long as needed to help a person with the essentials of personal financial management and some of the emotional aspects of financial pressure.

 In Hillsborough County, the Hillsborough County Extension Service has partnered with United Way of Tampa Bay to offer the program. University of Florida Extension serves to provide the infrastructure for this program throughout the state of Florida thanks to a gift from Bank of America.  For more information or to be paired with a mentor contact Lisa Leslie at (813) 744 – 5519 x15443 or lesliel@hillsboroughcounty.org.

Upcoming Webinars

Financial Apps
October 17, 12:30—1:30 PM
There’s an app for that!  Learn about popular financial management apps. Register at http://bit.ly/MoneyApp

Talking to Children about Money
November 3, 12:30-1:30 p.m.  Discover techniques parents can use to teach valuable money skills. Register at http://bit.ly/ChildrenMoney

August Webinars

Webinar: Plan Ahead to Meet the Rising Cost of College
August 9, 12:30 to 1:30 PM
We’ll discuss the pros & cons of various strategies including pre-paid, 529 plans, and student loans. Our discussion  will also include tax planning Issues.  Register at http://bit.ly/k6tYzl

 Webinar: Debt Managament Options , August 6, 12:30pm -1:30pm
Find out how to:

• Evaluate your level of debt
• Use Power Pay to calculate a debt free date
• Evaluate debt management options
• Avoid scams

Register now at http://bit.ly/oB6b2z

Financial Practices of Married Couples

A qualitative study published in the Journal of Family Economics explored the financial management practices of 64 couples who professed to having great marriages. The mean age of study participants was 57 for wives and 61 for husbands; the average number of years in their current marriage was 35; and the median household income of the group was $65,500.

According to the researchers, three themes emerged from their study. For most couples, one of the partners handled the day-to-day finances. The couples had little or no debt or had a goal of paying off debt. The couples lived within their means and were frugal.

Many of the couples had experienced financial challenges in the past. The researchers speculated that key to the couples self-reported marital success was how they dealt with the challenges. Their findings support existing research that trust and communication are key components of a successful marriage.

A link to the full study is at http://www.springerlink.com/content/j33g3p68p86q8531/fulltext.html

Fund Analyzer

The Financial Industry Regulatory Authority (FINRA) has a tool to help you compare up to 3 mutual funds or 3 exchange–traded funds. The side- by- side comparison helps you evaluate the impact of fees and expenses over a time on your investments.  It also has an Annual Expense Comparison feature that shows how a fund’s expense ratio compares to an industry average of similar funds.

The FINRA Fund Analyzer is available at www.finra.org/FundAnalyzer

Credit Card Balances & Credit Scores

A significant portion of your credit score is based on “amounts owed.” This is also referred to as debt utilization and is calculated by comparing outstanding balances to credit limits. A consumer who is maxed out is using most of the credit available to them and is likely to have a low credit score.

A general rule of thumb is to keep credit card utilization to less than 30% of your available limit. This applies even if you ay your balance in full every month because credit scores are based on monthly reported balances. So if you charge up to your credit limits each month the score will show that you are maxed out.

 The impact credit utilization has on your credit score is the reason that closing an account can negatively impact your score. Closing the card will lower your overall credit limit and could increase your debt utilization ratio if you close an account that is carrying a balance. It is better to payoff a balance before closing the account.

Goal-Based Investing

 Most of us have goals – building an emergency fund, retiring, funding a child’s education, increasing our cash flow - are just a few that come to mind. Goal-based investing is an investment strategy where the focus is on achieving specific personal financial goals and success is measured by goal achievement rather than beating market performance.

As with any type of goal planning, we are most likely to be successful if we nail down the specifics – such as the time frame to achieve and the amount of money needed. We also want to weigh the importance of each specific goal and consider the consequences of not achieving that goal. The next thing we want to decide on is which type of savings or investment product is most appropriate to help us achieve each specific goal in the desired time frame.

 Hillsborough County Extension in partnership with the Financial Planning Association of Tampa Bay will be presenting a goal-based investment workshop on Saturday June 25. For additional information visit http://hillsborough.extension.ufl.edu/

Money Adventures Camp for Teens

Money Adventures Camp for Teens

What: Money Adventures Camp
When: June 20 – 24, 8:00am – 5:00pm
Where: Hillsborough County Extension Office
Registration: Discounted registration is $22 due by June 6, after June 6 registration is $30.00
Registration Deadline: June 13

Hillsborough County Extension in partnership with United Way of Tampa Bay is offering a Money Adventures Camp for teens’ age 13-16 years old. The camp will feature hands-on learning activities dealing with credit, banking, car buying, and job searches & interviewing. The camp will also include fun afternoon field trips to go bowling, visit MOSI/IMAX, and play miniature golf. 

 The camp is scheduled for June 20 – 24 from 8:00am – 5:00pm at the Hillsborough County Extension Office, 5339 County Road 579, Seffner, 33584.  A discounted registration of $22.00 is due by June 6 and after that registration is $30, due no later than June 13. The registration fee covers all field trips and lunches. For more information or questions, please contact Kelli Serio at (813) 744-5519 x110 or SerioK@hillsboroughcounty.org or visit our web site http://hillsborough.extension.ufl.edu.